Company Law Board
Bangalore Sez Corporation Private ... vs Spa Enterprises Limited And Cheran ... on 11 December, 2006
Equivalent citations: [2007]139COMPCAS653(CLB)
ORDER
K.K. Balu, Vice-Chairman
1. In the company petition filed under Section 111 of the Companies Act, 1956 ("the Act") seeking directions for cancellation of the allotment of two crore shares of Rs. 10/- each in the name of the third applicant company in the capital of M/s Bangalore SEZ Corporation Private Limited ("the Company") and the consequent rectification of the register of members of the Company, the respondent 1 to 3 have filed the present application invoking Section 8 of the Arbitration & Conciliation Act, 1996 (Act, 1996) to refer the parties for arbitration mainly on the ground that the disputes raised before the Company Law Board arise out of certain agreements entered into between the first respondent, applicants 1 & 3 and Mr. Siddhartha Ray, Managing Director of the first respondent, which contain arbitration clause for dispute resolution.
2. The facts in brief are that the third respondent represented by the second respondent had agreed to bring in a sum of Rs. 35 crore into the Company towards share capital in terms of the agreement dated 18.05.2004, as amended on 16.06.2004, pursuant to which the third respondent remitted by way of a demand draft in July 2004 a sum of Rs. 20 crore through the fourth respondent, incorporated as a special purpose vehicle (SPY) by subscribing to two crore equity shares of Rs. 10/- each. The second respondent, being in control of the management and affairs of the Company was authorized to realise the draft for Rs. 20 crore to the credit of the Company. However, the second respondent using his power as the sole bank signatory of the Company after realisation of the proceeds unauthorisedly got transferred in October 2004 the said sum of Rs. 20 crore to M/s Cheran Constructions Limited, a company under the control and management of the second respondent, instead of using the capital amount subscribed for payment towards registration of the land allotted to the Company by the Karnataka Government, in violation of the Share Holders Agreement dated 01.07.2004, as amended on 26.08.2004. The respondents had in effect withdrawn the share capital of the Company without sufficient cause or authority of its board of directors, thereby the Company came to be saddled with a huge share capital of Rs. 20 crore without corresponding cash or other assets equivalent to its share capital, leading to the present company petition for cancellation of the allotment of two crore shares of Rs. 10/- each in the name of the fourth respondent and the consequent rectification of register of members of the Company by deleting the name of the fourth respondent therein. According to the applicants, the disputes raised in the company petition are arising out of and in connection with the agreement dated 01.07.2004 as amended by the second amended and restated shareholders agreement dated 26.08.2004, which contains an arbitration clause to resolve any dispute arising thereon between the parties.
3. Shri Karthik Seshadri, learned Counsel in support of the application submitted: While the petitioner, Data Access (India) Limited and third respondent entered into an agreement dated 18.05.2004; the petitioner, third respondent, Data Access (India) Limited, Pacific Net Investment Limited and the first respondent Company had on 16.06.2004 entered into an agreement, which were never acted upon by the parties. The petitioner, respondent Nos. 1 & 4 and Mr. Siddhartha Ray entered into a shareholders agreement on 01.07.2004, wherein the parties acknowledged that the fourth respondent had contributed a sum of Rs. 20 crores for which the fourth respondent was allotted two crore equity shares in the Company. The petitioner, by virtue of the agreement dated 01.07.2004, was obliged to ensure that land be registered in favour of the Company within a period of 45 days from the date of the said agreement. The agreement dated 01.07.2004 came to be amended on 16.08.2004 and again on 26.08.2004 and the latter amended agreement contains an arbitration clause to resolve any dispute arising thereon between the parties. The fourth respondent purchased two crore equity shares of Rs. 10/- each in the Company for Rs. 20 crore on the terms and conditions stipulated in the restated shareholders agreement dated 26.08.2004. All the obligations have not been fulfilled in terms of the agreement dated 26.08.2004. No measures were taken by, among others, the first respondent for registration of the land in favour of the Company as agreed to between the parties. The dispute that the first respondent has sought to raise in this petition arises out of the implementation, existence etc. of the agreement dated 01.07.2004 as amended on 16.08.2004 and restated agreement dated 26.08.2004. The second respondent and its Managing Director invoking the arbitration clause contained in the second amended agreement dated 26.08.2004 have filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 before the High Court of Delhi, praying for interim measures; inter-alia, to secure the amount of Rs. 1 crore paid to the applicants herein towards share application money and further to secure the land and the amount of Rs. 3 crores paid on behalf of the first applicant by the respondents herein to the Karnataka Government towards registration of land on which the Bangalore SEZ project was to be executed by the first applicant. The petitioners, without proving fraud or misrepresentation, cannot seek the prayer claimed in the present company petition and ought to have invoked the jurisdiction of Section 397. The petitioners, invoking the provisions of Section 111 cannot seek to cancel the issue of shares in the name of the third applicant in the capital of the Company. This dispute shall be settled by arbitration in terms of clause of 19.3 of the agreement dated 26.08.2004 and there is no scope to invoke Section 111 of the Act. By virtue of Clause 6 of the agreement dated 01.07.2004, the second applicant has been authorised to operate the bank account of the first applicant company, in his sole capacity, till such time the land transfer is complete and thereafter, the bank accounts shall be operated upon, as may be decided by the Board. Accordingly, the second applicant took away the amount of Rs. 20 crore on 29.10.2004. The land, under this agreement, ought to have been registered by August, 2004. The first two agreements are negotiated contracts and the respondents cannot question these agreements. By virtue of Section 16 of the Act 1996 the validity of the arbitration agreement has to be adjudicated by the arbitral tribunal. The remedy under Section 111 is not a statutory remedy and the parties can be relegated to the civil court. The petitioner, for breach of the agreement, will have to go before the Arbitrator as envisaged in the second amended restated agreement dated 26.08.2004 and not the CLB.
4. Mr. Feroz Ali, learned Counsel while opposing the company application submitted:
The relief sought for in the company petition cannot be granted by any arbitral tribunal. Furthermore, the reliefs claimed by the petitioner are beyond the scope of any of the agreements entered between the parties and not the subject matter of the agreements produced by the applicants. None of the agreements has been acted upon by the parties. The very authority and power of the applicant Nos. 2 & 3 to invest in the first applicant are being questioned before this Bench, which remain to be adjudicated in the present company petition. According to the petitioner, the money invested in the share capital of the first applicant herein has been withdrawn by the second applicant, himself signing the cheque for such withdrawal in favour of M/s Cheran Construction Limited, which is controlled by him. This gives sufficient cause to cancel the shares allotted in the name of the third applicant and rectify the register of members of the Company and not referable to arbitration. This relief being a statutory relief is not governed by any contract or agreement and therefore, the power of this Board to grant such relief cannot be interfered with by an application to refer the parties to arbitration. The Supreme Court in Haryana Telecom Limited v. Sterlite Industries (India) Limited and the Delhi High Court in M/s Prime Century City Developments Private Limited v. Ansal Build Well Limited (2003) Vol.42 SCL 256 held that any reference under Section 8 of the Act 1996 can be referred to an arbitrator only when he is competent to decide the disputes in question. The arbitrator is not empowered to grant any statutory relief of cancellation of the shares or rectification of the register, over which the CLB alone will have the jurisdiction. The statutory jurisdiction of the CLB cannot be ousted even by the consent of the parties, as held by this Board in M/s Altek Lammertz Needles Limited v. Lammertz Industriendal GmbH (2006) 129 CC 108 and Kasturi and Sons Limited v. Sporting Pastime India Limited. The subject matter of the company petition is not the same as the subject matter of the arbitration agreement. The Supreme Court in P. Anand Gajapathi Raju v. PVG Ruju (2004) 4 SCC 539 held that one of the pre-conditions to be satisfied before invoking the jurisdiction of the judicial authority under Section 8 of the Act 1996 includes the fact that the "subject matter of the action is the same as the subject matter of the arbitration agreement". Furthermore, the third respondent herein, is not a party to the arbitration agreement, which is one of the essential requirements as laid down in BPL Communications Limited v. Punj Lloyd Limited 2004 (1) Arb. LR 45. Section 111(4) of the Act confers a statutory right to apply to the CLB for rectification of the register. The right may be exercised by 'the person aggrieved' or any member of the company or the company itself. This section confers a statutory right to approach a special forum irrespective of the existence of an arbitration agreement. Section 111(4) not only deals with the situation where the name is entered without sufficient cause but also includes the situation, where the name remains without sufficient cause. Otherwise, it would result in grave prejudice as has happened in the instant case, where the second applicant has succeeded in taking over a company without paying any amount. It is not necessary, as pointed out by the applicants, to plead fraud, mistake or any such other acts on the part of the petitioner to claim any relief under Section 111. The fact that the money was misused illegally, not envisaged by the parties is enough to maintain the petition under Section 111. The entire amount of Rs. 20 crores was taken away by the second applicant for causes other than that of the business of the Company. There is no proof that the money was used for the business purposes of the Company. The Company was first to acquire the land and there was no business at that point of time except acquiring the land which never happened. The shares remaining without any consideration must be annulled. The agreement does not envisage a situation where the share capital of Rs. 20 crore would be taken away from the Company. Consequently, no arbitrator has jurisdiction to try the issue of withdrawal of money contributed towards capital of the Company. The amount of Rs. 20 crore was brought into the Company only after the agreement dated 26.08.2004 came to be executed and therefore, after taking away illegally the money, the applicants cannot now rely on the agreement. Section 12.1(iv) of the agreement specifies that material breach of any obligations by the parties to the agreement and dispute arising out of such specified breach is referable to an arbitrator. However, the act complained of in the present petition does not fall under Section 12.1(iv) of the agreement. Furthermore, Section 12.2 provides that the matters stated in Section 12.1 shall be capable of being declared as events of default only by the third applicant, in which case there is no effective remedy available to the first respondent under the agreement. In the event of the first respondent bringing the issue of cancellation of shares as a dispute before the arbitrators, the third applicant can successfully negate the effect of Section 12.1. The agreement dated 01.07.2004 does not contain events of default or time-limit for completion of approvals or arbitration clause. All these conditions were added after the third applicant had taken over the Company, when the first respondent had no power to bargain. The agreement is lop-sided and the first respondent can have no remedy under the agreement. Section 3.5 imposes personal obligations upon the first respondent to ensure/obtain Government approvals, illustrating the lopsidedness of the agreement. Whereas the third applicant breached its obligation under Section 3.1(i) by withdrawing the entire Rs. 20 crore as early as on 29.10.2004, when the first respondent had time till 11.11.2004 to discharge its obligations. The subject matter, parties and reliefs claimed in OMP No. 104 of 2005 and OMP No. 336 of 2005 on the file of Delhi High. Court are entirely different from those of the present company petition. In view of these reasons the application under Section 8 of the Act 1996 is not maintainable and liable to be dismissed.
5. I have considered the arguments of learned Counsel. The issue that arises for consideration is whether the parties before me must be referred to arbitration by virtue of Section 8 of the Act, 1996 for adjudicating the subject dispute in the facts and circumstances of the present case. By virtue of Section 8, it is mandatory for the judicial authority, before which an action has been brought in a matter, being the subject matter of an arbitration agreement, to refer the parties for arbitration provided, (a) the application under this section is made any time before submitting the "first statement on the substance of the dispute"; and (b) the judicial authority is satisfied that there is a valid arbitration agreement. Sub-section (3) provides that an arbitration may be commenced or continued and an arbitral award be made in spite of (a) the ' application made under Sub-section (1) and (b) the pendency of the issue before the judicial authority.
A close perusal of the agreement dated 26.08.2004 reveals that all the parties to the company petition are not parties to the agreement dated 26.08.2004. While the respondents 2 & 3 are parties to the company petition, they are not parties to the said agreement. It is not the case of the applicants that respondents 2 and 3 to the company petition are not formal parties and further that no relief as claimed in the company petition can be granted in the absence of those respondents. I therefore, find that there is no commonality of the parties to the present proceedings and the agreement dated 26.08.2004, which is one of the essential requirements of Section 8 of the Arbitration and Conciliation Act, 1996 and as reiterated in BPN Communications Limited v. Punj Lloyd Limited (supra). In this connection, beneficial reference is invited to a decision of the apex court in Sukanya Holdings (P) Limited v. Jayesli H. Pandey , wherein, while interpreting Section 8 of the Arbitration and Conciliation Act, it has been held, inter-alia, that there is no provision dealing with the situation where some parties to the suit are not parties to the arbitration agreement. A judicial body may, therefore, refer the parties to the arbitration only in cases, among other things, where all the parties to the proceedings are the parties to the arbitration agreement.
The agreement dated 26.08.2004 sets forth exhaustively the rights and obligations of the parties with respect to the management and operations of the Company and related matters as well as events of default. The following shall constitute events of default for purposes of this agreement:
(i) Death, disability, resignation or any other event, occurrence or factor resulting in the inability of SPA and Mr. Peeran to adequately perform their responsibilities as described herein;
(ii) Default in repayment of any loans or other borrowings, whether secured or unsecured, obtained by BSEZ;
(iii) Change in Law including changes to tax laws, external commercial borrowing regulations or foreign investment laws which have an adverse impact on the ability of any of the Shareholders to. continue to hold Shares;
(iv) Material breach of any obligations by any of the Parties to this Agreement, including without restriction, the failure to adhere to any of the time limits envisaged in this Agreement, time being of the utmost essence for this Agreement;
(v) Misrepresentation by any of the Parties hereto under or in relation to this Agreement;
(vi) If any of the Parties hereto goes into liquidation or a receiver or trustee is appointed in bankruptcy, receivership or reorganization or if a Party is adjudged insolvent by a court of competent jurisdiction;
(vii) If any of the Shareholders sells or disposes of all or substantially all of the business, undertaking or assets of its operations that are relevant to BSEZ and/or its Business, unless a prior written consent for such sale or disposal was obtained from the other Shareholders;
(viii) If BSEZ is not able to meet its financial or Business targets stipulated in the Annual Business Plan;
(ix) Occurrence of an event of default under the documents' evidencing the Investor Loan.
Section 3.1(i) of the agreement dated 26.08.2004 stipulates that the consideration of Rs. 20 crore brought in by the fourth respondent shall be used for registration of the land in favour of the Company. Section 3.1(11) provides all measures would be under taken by the petitioner to ensure that the land is registered in favour of the Company not later than 11.11.2004. However, the second respondent had admittedly withdrawn the entire Rs. 20 crore even as on 29.10.2004, leading to a piquant situation that the share capital of the Company remains without any consideration to the extent of Rs. 20 crore withdrawn by the second respondent. In this context, the petitioner seeks to (a) cancel the allotment of two crore shares of Rs. 10/- each in the name of the fourth respondent; and (b) rectify the register of members of the Company by deleting the name of the fourth respondent therein. The relief of rectification of the register of members of the Company is neither covered under any of the agreements entered between the parties nor the subject matter of the agreements produced by the parties. The agreement does not contemplate the present situation, where the share capital of Rs. 20 crore was taken away from the Company. Thus there is no commonality of issues to the company petition and the agreement dated 26.08.2004. The Supreme Court in P. Anand Gajapathi Raju v. PVG Raju (supra), while laying down the essential requirements for invoking Section 8 of the Arbitration and Conciliation Act held, inter-alia, that the subject matter of the action must be the same as the subject matter of the arbitration agreement. Furthermore, such relief cannot be claimed before the arbitral tribunal. It is neither within the competence of the arbitral tribunal to adjudicate and grant, any statutory relief. This Board in Lammertz Industrial GmbH v. Altek Lammertz Needles Limited (supra) held that where the petitioner is enforcing his statutory power which can be . adjudicated without reference to the terms of the agreement containing arbitration clause and where the reliefs cannot be granted by an arbitrator, the statutory jurisdiction of the CLB cannot be ousted even by the consent of the parties. The grievances raised in the company petition, in my view, can be adjudicated without reference to any of the agreements entered between the contesting parties and such charges, if established, would entitle the petitioner for appropriate relief in terms of Section 111 of the Act, in which case, the question of referring the parties to arbitration does not arise. Any reference under Section 8 of the Arbitration and Conciliation Act can be referred to an arbitrator only when he is competent to decide the issue in question, as held in Haryana Telecom Limited v. Sterlite Industries (India) Limited and Prime Century City Developments Private Limited v. Ansal Build Well Limited (supra). It is far from doubt that no arbitrator is empowered either to cancel the shares or order rectification of register of the members of a company.
In view of my foregoing conclusions, the prayer of the applicant to refer the parties before the CLB to arbitration in terms of Section 8 of the Arbitration and Conciliation Act does not merit any consideration and accordingly the application is rejected. The respondent will file their counter by 16.01.2007 and rejoinder if any to be filed by 12.02.2007, the company petition will be heard on 15.02.2007 at 2.30 p.m.